[Federal Register: August 11, 2000 (Volume 65, Number 156)]
[Rules and Regulations]
[Page 49189-49192]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11au00-1]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 360
RIN 3064-AC28
Treatment by the Federal Deposit Insurance Corporation as
Conservator or Receiver of Financial Assets Transferred by an Insured
Depository Institution in Connection With a Securitization or
Participation
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Final rule.
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SUMMARY: The Federal Deposit Insurance Corporation (the FDIC) has
adopted a rule regarding the treatment by the FDIC, as receiver or
conservator of an insured depository institution, of financial assets
transferred by the institution in connection with a securitization or
in the form of a participation. The rule resolves issues raised by
Financial Accounting Standards Board (FASB) Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS 125). The rule provides that with
respect to financial assets transferred by an institution in connection
with a securitization or in the form of a participation, and subject to
certain conditions described in the rule, the FDIC will not seek to
recover or reclaim such financial assets in exercising its statutory
authority to repudiate contracts pursuant to section 11(e) of the
Federal Deposit Insurance Act. The rule also provides that the FDIC
will not seek to enforce the ``contemporaneous'' requirement of
sections 11(d)(9), 11(n)(4)(I), and 13(e). The final rule applies to
securitizations and participations that are engaged in while the rule
is in effect, even if the rule is later repealed or amended.
EFFECTIVE DATE: September 11, 2000.
FOR FURTHER INFORMATION CONTACT: Michael Krimminger, Division of
Resolutions and Receiverships, (202) 898-8950; Robert Storch, Division
of Supervision, (202) 898-8906; or Thomas Bolt, Legal Division, (202)
736-0168, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Pursuant to 12 U.S.C. 1821(e)(1), the FDIC, when acting as
conservator or receiver of any insured depository institution, has the
power to disaffirm or repudiate any contract or lease (i) to which the
institution is a party; (ii) the performance of which the conservator
or receiver, in the conservator's or receiver's discretion, determines
to be burdensome; and (iii) the disaffirmance or repudiation of which
the conservator or receiver determines, in the conservator's or
receiver's discretion, will promote the orderly administration of the
institution's affairs. Repudiation of a contract relieves the FDIC from
performing any unperformed obligations remaining under the contract.
Repudiation also entitles the other party to the contract to a claim
for damages, which are limited by statute to actual direct compensatory
damages determined as of the date of the appointment of the receiver or
conservator. See 12 U.S.C. 1821(e)(3).
In addition, pursuant to 12 U.S.C. 1821(d)(9), 1821(n)(4)(I), and
1823(e), no agreement that tends to diminish or defeat the FDIC's
interest in an asset acquired from an insured depository institution is
enforceable against the FDIC unless such agreement meets certain
requirements. One of those requirements is that the agreement be
executed by the depository institution and by any person claiming an
adverse interest thereunder contemporaneously with the acquisition of
the asset by the institution. This is referred to as the
``contemporaneous'' requirement.
Under generally accepted accounting principles, a transfer of
financial assets is accounted for as a sale if the transferor
surrenders control over the assets. One of the conditions for
determining whether the transferor has surrendered control is that the
assets have been isolated from the transferor, i.e., put presumptively
beyond the reach of the transferor and its creditors, even in
bankruptcy or receivership. This is known as the ``legal isolation''
condition.
Whether the legal isolation condition has been met is determined
primarily from a legal perspective. This determination involves
considerations of the kind of receivership into which the transferor
may be placed and the powers of the receiver to reach assets that were
transferred prior to its appointment. If the available evidence
provides reasonable assurance that the transferred assets would be
beyond the reach of the powers of a bankruptcy trustee or receiver for
the transferor, then a determination that the transferred assets have
been legally isolated is appropriate.
Where the transferor is an insured depository institution for which
the FDIC may be appointed as conservator or receiver, the issue arises
whether financial assets transferred by the institution in connection
with a securitization or in the form of a participation would be put
beyond the reach of the FDIC as conservator or receiver for the
institution in light of (i) the statutory authority of the FDIC to
repudiate contracts to which such institution is a party and (ii) the
provisions of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the Federal
Deposit Insurance Act regarding the enforceability of agreements
against the FDIC. The specific issues are whether the FDIC might, in
the exercise of its authority to repudiate contracts, avoid a transfer
of financial assets in connection with a securitization or in the form
of a participation, and recover such assets; and whether the FDIC might
challenge the enforceability of an agreement executed in relation to a
transfer of financial assets in connection with a securitization or a
participation by asserting the ``contemporaneous'' requirement with
respect to such an agreement.
The final rule resolves these issues by clarifying the powers of
the FDIC as conservator or receiver with respect to financial assets
transferred by an insured depository institution in connection with a
securitization or in the form of a participation. The FDIC believes
that this clarification should provide sufficient assurance to
determine that the legal isolation condition is met.
[[Page 49190]]
II. Proposed Rule
In September 1999, the FDIC requested comments on a proposed rule
\1\ that provided that the FDIC shall not, by exercise of its authority
to disaffirm or repudiate contracts under 12 U.S.C. 1821(e), reclaim,
recover, or recharacterize as property of the institution or the
receivership any financial assets transferred by an insured depository
institution in connection with a securitization or in the form of a
participation. The proposed rule would apply only to those
securitizations or participations in which the transfer of financial
assets meets all conditions for sale accounting treatment under
generally accepted accounting principles, other than the ``legal
isolation'' condition as it applies to institutions for which the FDIC
may be appointed as conservator or receiver, which would be addressed
by the proposed rule. The proposed rule defined both ``securitization''
and ``participation'', with ``participation'' specifically limited to
participations that are ``without recourse'' to the selling or ``lead''
institution. ``Without recourse'' would mean that the participation
must not be subject to any agreement that requires the lead to
repurchase the participant's interest or to otherwise compensate the
participant upon the borrower's default on the underlying obligation.
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\1\ 64 FR 48968, Sept. 9, 1999.
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The proposed rule would not apply unless the insured depository
institution received adequate consideration for the transfer of
financial assets at the time of the transfer, and the documentation
effecting the transfer of financial assets reflects the intent of the
parties to treat the transaction as a sale, and not as a secured
borrowing, for accounting purposes.
The proposed rule further provided that it shall not be construed
as waiving, limiting or otherwise affecting the rights or powers of the
FDIC to take any action or to exercise any power not specifically
limited by this section, including, but not limited to, any rights,
powers or remedies of the FDIC regarding transfers taken in
contemplation of the institution's insolvency or with the intent to
hinder, delay, or defraud the institution or the creditors of such
institution, or that is a fraudulent transfer under applicable law.
The proposed rule clarified that although the repudiation of a
securitization or participation will not affect transferred financial
assets, repudiation will excuse the FDIC from performing any continuing
obligations imposed by the securitization or participation. If the
FDIC, in order to terminate such continuing obligations or duties,
seeks to disaffirm or repudiate an agreement or contract under which an
insured depository institution has transferred financial assets in
connection with a securitization or in the form of a participation, the
FDIC will not seek to reclaim, recover, or recharacterize as property
of the institution or the receivership such financial assets.
The proposed rule further provided that the FDIC shall not seek to
avoid an otherwise legally enforceable securitization agreement or
participation agreement executed by an insured depository institution
solely because such agreement does not meet the ``contemporaneous''
requirement of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the Federal
Deposit Insurance Act.
The proposed rule was intended to apply to securitizations and
participations that are engaged in by insured depository institutions
while the rule is in effect, even if the rule is later repealed.
Consequently, the last paragraph of the proposed rule provided that the
rule would be effective unless repealed by the FDIC upon 30 days notice
and opportunity for comment provided in the Federal Register, but in
the event of such repeal, the rule would continue to be effective with
respect to any transfers made before the date of the repeal.
III. Summary of Comments
The FDIC received 14 comment letters concerning the proposed rule.
The vast majority of the commenters expressed support for the rule.
One commenter specifically requested that FDIC counsel issue,
concurrently with the adoption of the rule, a legal opinion confirming
that paragraph (g) of the rule will bind receivers or conservators
appointed after the repeal or amendment of the rule. In this
commenter's view, such an opinion would be necessary for legal
specialists ``* * * to render opinions that provide reasonable
assurance that the legal isolation condition of SFAS 125 is met.''
Other commenters disagreed with this view, but endorsed the issuance of
an FDIC legal opinion if this would resolve the issue. Two commenters
expressed the view that such an opinion was unnecessary.
The FDIC believes that the final rule more than adequately provides
reasonable assurance as to how the FDIC as conservator or receiver of a
depository institution would treat financial assets transferred by the
institution in connection with a securitization or in the form of a
participation. Paragraph (g) of the rule, the safe harbor provision for
transfers made in connection with a securitization or in the form of a
participation that was in effect before any repeal or amendment of the
rule, is clear and unambiguous. The FDIC believes that an opinion by
FDIC counsel that paragraph (g) will bind receivers or conservators
appointed after any repeal or amendment of the rule would not add
anything that is not already contained in the rule itself or in this
preamble.
Other commenters sought clarification regarding the term ``without
recourse'' used in the definition of participation. While the presence
of recourse does not necessarily require that a transaction be
characterized as a security interest instead of as a sale, see Major's
Furniture Mart, Inc. v. Castle Credit Corporation, Inc., 602 F.2d 538
(3rd Cir. 1979), courts generally view a transaction as a participation
only if the buyer does not have recourse against the seller when a
default occurs on the underlying obligation. See, e.g., In re Sackman
Mortgage Corp., 158 B.R. 926, 931-34 (Bankr. S.D.N.Y. 1993). The final
rule maintains this distinction.
The final rule's definition of a participation as a transfer of an
interest in a loan or a lease without recourse by the buyer against the
lead should not exclude participations in which (a) the lead retains a
subordinated interest in the obligation, against which losses are
initially allocated; (b) the lead participated a loan in order to avoid
a statutory lending limit violation, with the option of reacquiring
some or all of the transferred interest when reacquisition would not
result in a lending limit violation; or (c) the participation agreement
provided for repurchase or compensation in connection with customary
representations and warranties regarding the underlying asset. Thus,
the meaning of the term ``recourse'', as used in the final rule,
differs from its meaning for purposes of the FDIC's risk-based capital
standards, 12 CFR Part 325, Appendix A.
One commenter expressed concern regarding the effect of the
proposed rule on (a) a transaction that purports to be a participation,
but includes recourse against the lead, and (b) a transaction that
purports to be a sale (not a participation) of all of a financial
asset, but includes recourse against the seller. A transaction that
purports to be a participation, but includes recourse against the lead,
is not encompassed by the rule; the FDIC, under certain
[[Page 49191]]
circumstances, may recover previously transferred assets as a result of
repudiation. As discussed, under the general legal view, a transaction
that purports to be a participation but includes recourse against the
lead would be characterized as a secured borrowing rather than as a
participation. If the FDIC repudiated such a transaction, it would be
entitled to recover any collateral to the extent that the value of the
collateral exceeds the claim for repudiation damages, which is
determined as of the date of the appointment of the conservator or
receiver.
On the other hand, a transaction that purports to be a sale (not a
participation) of all of a financial asset, even if it includes
recourse against the seller, which would be characterized as a sale
under the general legal view, should not need to be encompassed by the
rule; the FDIC would not be able to recover transferred assets as a
result of repudiation. In the case of a completed sale, the FDIC would
have nothing to repudiate if no further performance is required. Even
in the case of a sale transaction that imposes some continuing
obligation, a repudiation by the FDIC would relieve the FDIC from
future performance, but generally should not result in a recovery of
any property that was transferred by the institution before the
appointment of the conservator or receiver.
IV. Final Rule
The final rule is identical to the proposed rule except for the
following. First, the proposed rule's definition of the term
``participation'' included language that referred to ``the borrower's
default'' in describing the meaning of the term ``without recourse''.
Since a participation may involve a lease as well as a loan, the final
rule refers to ``a default on the underlying obligation'' instead of
``the borrower's default''.
Second, paragraph (g) of the final rule refers to any amendment of
the rule, in addition to any repeal. Paragraph (g) of the final rule
provides that any repeal or amendment of the rule by the FDIC shall not
apply to any transfers of financial assets made in connection with a
securitization or participation that was in effect before such repeal
or amendment. The revision is intended to make paragraph (g) more
effective as a safe harbor provision if the rule is ever repealed or
amended in such a way as to preclude subsequent transfers of financial
assets by depository institutions from satisfying the legal isolation
requirement of SFAS 125. As a result of paragraph (g), if the FDIC is
appointed as conservator or receiver of a depository institution after
any repeal or amendment of the rule, the rule will continue to be
effective with respect to a transfer that was made in connection with a
securitization or participation in effect before the repeal or
amendment. Thus, where a transfer of financial assets in connection
with a securitization or in the form of a participation is made by a
depository institution and the securitization or participation was in
effect before any repeal or amendment of the rule by the FDIC, such
transfer will continue to satisfy the legal isolation requirement
notwithstanding the repeal or amendment.
The rule is not intended to describe the exclusive circumstances in
which legal isolation may occur. For purposes of the rule, the term
``special purpose entity'' encompasses a trust (including a grantor or
owner trust), a corporation, and a limited liability company or
partnership organized in compliance with applicable state law.
V. Matters of Regulatory Procedure
Paperwork Reduction Act
No collection of information pursuant to section 3504(h) of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in the
final rule. Consequently, no information was submitted to the Office of
Management and Budget for review.
Regulatory Flexibility Act
The final rule is consistent with the FDIC's current practice and
does not represent a change in the law with respect to securitizations
and participations. Pursuant to section 605(b) of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.), it is certified that the final
rule will not have a significant economic impact on a substantial
number of small business entities.
Small Business Regulatory Enforcement Fairness Act
The Office of Management and Budget has determined that the rule is
not a ``major rule'' within the meaning of the relevant sections of the
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) (5
U.S.C. 801 et seq.). As required by SBREFA, the FDIC will file the
appropriate reports with Congress and the General Accounting Office so
that the final rule may be reviewed.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat.
2681 (1998).
List of Subjects in 12 CFR Part 360
Banks, banking, Savings associations.
For the reasons set out in the preamble, the FDIC Board of
Directors amends 12 CFR part 360 as follows:
PART 360--RESOLUTION AND RECEIVERSHIP RULES
1. The authority citation for part 360 is revised to read as
follows:
Authority: 12 U.S.C. 1821(d)(1), 1821(d)(11), 1821(e)(1),
1821(e)(8)(D)(i), 1823(c)(4), 1823(e)(2); Sec. 401(h), Pub. L. 101-
73, 103 Stat. 357.
2. Section 360.6 is added to part 360 to read as follows:
Sec. 360.6 Treatment by the Federal Deposit Insurance Corporation as
conservator or receiver of financial assets transferred in connection
with a securitization or participation.
(a) Definitions. (1) Beneficial interest means debt or equity (or
mixed) interests or obligations of any type issued by a special purpose
entity that entitle their holders to receive payments that depend
primarily on the cash flow from financial assets owned by the special
purpose entity.
(2) Financial asset means cash or a contract or instrument that
conveys to one entity a contractual right to receive cash or another
financial instrument from another entity.
(3) Participation means the transfer or assignment of an undivided
interest in all or part of a loan or a lease from a seller, known as
the ``lead'', to a buyer, known as the ``participant'', without
recourse to the lead, pursuant to an agreement between the lead and the
participant. Without recourse means that the participation is not
subject to any agreement that requires the lead to repurchase the
participant's interest or to otherwise compensate the participant due
to a default on the underlying obligation.
(4) Securitization means the issuance by a special purpose entity
of beneficial interests:
(i) The most senior class of which at time of issuance is rated in
one of the four highest categories assigned to long-term debt or in an
equivalent short-term category (within either of which there may be
sub-categories or gradations indicating relative standing) by one or
more nationally recognized statistical rating organizations, or
(ii) Which are sold in transactions by an issuer not involving any
public offering for purposes of section 4 of the
[[Page 49192]]
Securities Act of 1933 (15 U.S.C. 77d), as amended, or in transactions
exempt from registration under such Act pursuant to Regulation S
thereunder (or any successor regulation).
(5) Special purpose entity means a trust, corporation, or other
entity demonstrably distinct from the insured depository institution
that is primarily engaged in acquiring and holding (or transferring to
another special purpose entity) financial assets, and in activities
related or incidental thereto, in connection with the issuance by such
special purpose entity (or by another special purpose entity that
acquires financial assets directly or indirectly from such special
purpose entity) of beneficial interests.
(b) The FDIC shall not, by exercise of its authority to disaffirm
or repudiate contracts under 12 U.S.C. 1821(e), reclaim, recover, or
recharacterize as property of the institution or the receivership any
financial assets transferred by an insured depository institution in
connection with a securitization or participation, provided that such
transfer meets all conditions for sale accounting treatment under
generally accepted accounting principles, other than the ``legal
isolation'' condition as it applies to institutions for which the FDIC
may be appointed as conservator or receiver, which is addressed by this
section.
(c) Paragraph (b) of this section shall not apply unless the
insured depository institution received adequate consideration for the
transfer of financial assets at the time of the transfer, and the
documentation effecting the transfer of financial assets reflects the
intent of the parties to treat the transaction as a sale, and not as a
secured borrowing, for accounting purposes.
(d) Paragraph (b) of this section shall not be construed as
waiving, limiting, or otherwise affecting the power of the FDIC, as
conservator or receiver, to disaffirm or repudiate any agreement
imposing continuing obligations or duties upon the insured depository
institution in conservatorship or receivership.
(e) Paragraph (b) of this section shall not be construed as
waiving, limiting or otherwise affecting the rights or powers of the
FDIC to take any action or to exercise any power not specifically
limited by this section, including, but not limited to, any rights,
powers or remedies of the FDIC regarding transfers taken in
contemplation of the institution's insolvency or with the intent to
hinder, delay, or defraud the institution or the creditors of such
institution, or that is a fraudulent transfer under applicable law.
(f) The FDIC shall not seek to avoid an otherwise legally
enforceable securitization agreement or participation agreement
executed by an insured depository institution solely because such
agreement does not meet the ``contemporaneous'' requirement of sections
11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act
(12 U.S.C. 1821(d)(9), (n)(4)(I), 1823(e).
(g) This section may be repealed or amended by the FDIC upon 30
days notice and opportunity for comment provided in the Federal
Register, but any such repeal or amendment shall not apply to any
transfers of financial assets made in connection with a securitization
or participation that was in effect before such repeal or modification.
By order of the Board of Directors.
Dated at Washington, D.C. this 27th day of July, 2000.
Federal Deposit Insurance Corporation.
James D. LaPierre,
Deputy Executive Secretary.
[FR Doc. 00-20193 Filed 8-10-00; 8:45 am]
BILLING CODE 6714-01-P
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